Exchanges to Washington: don’t flood us with swaps

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By Jonathan Spicer
NEW YORK, April 13 (Reuters) – Big exchanges and clearinghouses are key planks in the U.S. government’s plan to revamp derivatives markets, but the fierce competitors warned in near-unison on Tuesday that lawmakers should not recklessly force more products through them than is appropriate.
A day before a White House meeting on financial regulatory reform, officials from CME Group Inc <CME.O>, NYSE Euronext <NYX.N> and others that stand to gain from handling more over-the-counter swaps said the political push was nonetheless a big concern.
“It’s a fear for all of us that operate clearinghouses that we’ll now be told how to manage risk when we’ve proven again and again through some of the worst financial crises … we can manage that risk flawlessly,” Derek Sammann, managing director of CME’s financial products and services unit, told Reuters.
“Why does the government feel it can do that better when we’re spending the bulk of our time educating those very legislators as to what it is we do, and how we do it?” he said on the sidelines of a Futures Industry Association conference.
“I think you risk overreaching and actually creating risk where there was none before.”
Complicated derivatives, such as credit default swaps, are seen as a major cause of the 2007-2009 financial crisis. Lawmakers and regulators internationally want more visibility into the private $450 trillion market, and proposed running the “standardized” products through exchanges and clearinghouses.
A bipartisan draft bill fell through last month in the U.S. Senate Banking Committee, while a parallel effort in the Agriculture Committee has been delayed repeatedly. The Senate may soon tackle a draft Banking Committee bill that would push as many swaps as possible through exchanges and clearinghouses. [ID:nN13250708]
Clearinghouses stand between all parties in a market, guaranteeing their obligations in the case of a default.
Exchange operators have raced to launch clearinghouses ahead of any new laws, often signing on big dealers as revenue-sharing members in order to attract trading. They have warned in the past that not all OTC products are suitable for clearing, and that even fewer are suitable for exchange-trading.
“The two issues that were at the core of the financial crisis were lack of transparency and lack of central clearing,” Thomas Callahan, head of NYSE Euronext’s U.S. futures business, told the conference. “What you’re seeing is all sorts of people with various agendas coming in and piling on these issues, and certainly some of these issues could be horrifically disruptive to our business.”
Thomas Farley, president of IntercontinentalExchange Inc’s <ICE.N> U.S. futures unit, said forced clearing of swaps is his biggest concern of several possible regulatory changes including forced swaps trading; commodity market position limits; and the debate over freely moving positions between exchanges. [ID:nN13140447]
“All those give us some pause in part because we feel it’s coming a bit from an anti-bank bias,” he told the conference.
Farley likened the overall reform push to too many doctors performing too many operations on an injured patient:
“You could have just solved that dislocated shoulder problem, in the case of financial reform, really with trade repositories and some minimal systemic risk oversight,” he said. “We in this room are now the patient getting the 14 unnecessary surgeries — and by the way, those surgeries are being done with a hatchet and not a scalpel.” (Reporting by Jonathan Spicer, editing by Matthew Lewis) ((jonathan.spicer@thomsonreuters.com; + 1 646-223-6253; Reuters Messaging: jonathan.spicer.reuters.com@reuters.net))
Keywords: REGULATION EXCHANGES/SWAPS